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Revised Proposal Mandates Level Fee

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WASHINGTON–Broker-dealers and advisors can only be paid on a “level-fee” basis for providing investment suggestions to retirement plan beneficiaries under a revised rule proposed by the Obama administration Friday.

The mandate for level-fee payments both for the actual advisor and the broker-dealer is the key change distinguishes the proposed rule from rules implementing a 2006 law passed by Congress, as proposed by the Bush administration; and the rules proposed for comment by the Obama administration.

The law is the Pension Protection Act of 2006.

Another final rule published by the Department of Labor establishes new guidelines for the disclosure of funding and other financial information to workers participating in multi-employer retirement plans (i.e., those collectively bargained by unions and groups of employers).

According to a DOL official, “[The DOL rule] will ensure transparency by guaranteeing that workers can better monitor the financial condition and day-to-day operations of their retirement investments.” The DOL rule goes into effect in April 2010.

The investment advice rule is being published for comment this week in The Federal Register. Comments will be accepted through May 2.

Under the revised proposed regulation respecting investment advice employers who allow outsiders to provide investment advice to beneficiaries of 401(k)s and individual retirement accounts can be protected from liability in the event the investments don’t perform well–but only if the advice is provided through two means.

One is through the use of a computer model certified as unbiased. The other is through an advisor compensated on a “level-fee” basis (wherein fees do not vary based on investments selected by the participant).

According to officials of the National Association of Insurance and Financial Advisors, the computer model arrangement will qualify under the statutory exemption if it is based on generally accepted investment theories.

The theories must factor in historic risk and return data of different investments over defined periods of time; plus investment management and other fees and expenses attendant to the recommended investments, the official said.

Under the proposed rule, investment advisors must also comply with annual notice and audit requirements. They also must provide, at no charge, information regarding the advisor’s fees and relationships with others involved in the selection and management of the participant/beneficiary’s investment choices.

The advisor must also make plan participants/beneficiaries aware that other sources of investment advice are available, the NAIFA official said.

The official said that, based on a preliminary review of the proposed investment advice rule, insurance agents and brokers will not be affected by the change in the proposed rules made by the Obama administration.

But, broker-dealers, banks, mutual funds and other providers will be affected because they won’t be allowed to earn more selling any particular product, the industry the official said.

Dallas Salisbury, CEO of the Employee Benefit Research Institute, said the regulated issued by the Bush administration was “generally well-received by financial firms and Republicans in Congress.

But Democrats and consumer groups were upset because they thought the rules violated the intent of the 2006 law that revised investment advisory rules, Salisbury said.

The Bush administration published final rules implementing the 2006 law in November 2008, but they were vacated before they went into effect in January 2009 as one of the first acts of the new administration, he said.

“This is the re write that is a blend of positions,” Salisbury said.

“The regulation will provide clarity of what is and is not legal,” Salisbury said.

He said the rule will make advice more common than before the 2006 law was passed,” he said.

Salisbury said the new rule “will likely require some providers and plan sponsors to change advice provisions they put in place following PPA, thinking they knew what the regulations would look like, got that in the Bush regulation, but now have to figure out the implications of the new version.”